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Permian Basin Area Foundation

The Upside of Downsizing

bungalowOne of the great things about Permian Basin Area Foundation is its ability to accept non-cash, non-traditional gifts like real estate. The majority of us own at least one home and as our population continues to age, there is often a need to downsize and simplify.

That process is frequently complicated and, due to increased home value over time, can result in a sale that creates a tax burden. No one enjoys paying more than necessary in taxes. Fortunately, there are ways to decrease or even eliminate tax while doing something great for the community.

Consider the story of Dora and Henry. The two were married for 61 years when Henry passed away leaving Dora with two children who are in their 50’s.

After moving to Texas in 1960, the couple bought a four-bedroom home in a cute neighborhood. There was room for the kids and even a home office. Twenty years later, both children moved out and were raising families of their own.

Dora and Henry purchased their home for $150,000. Because it is in a prime location, the home appreciated to $750,000 over the years. Dora felt that it was time to consider the possibility of selling the home and moving into condo in a senior community so she sat down with her CPA, David.

Dora: “David, there was a time when Henry and I needed all the space of a four bedroom home when we were raising two children. But I don’t need that much house anymore with them gone and it’s become a financial burden to maintain. I’d feel safer and happier in a nice small home near all my friends. I’ve been doing a little research and think I may have found something for around $300,000 that would be perfect for me.”

David: “That’s probably a very wise consideration, Dora. At some point, it makes sense for most of us to downsize. Your initial purchase price of $150,000 and an increase in basis when Henry passed away leaves you with a basis of around $400,000 in your home. If you sold it for $750,000, the gain would be $350,000. You have a $250,000 exclusion on the sale of your principal residence but the last $100,000 would be taxable.”

Dora: “Well, I don’t think I want to pay tax on that much money. What if I made a gift to the community foundation that Henry and I supported for so long? We always considered starting an endowment but wondered if we would have enough money to fund it. Perhaps I could name it in his honor and designate the proceeds to his favorite charities…”

David: “That would work well and I’m sure Henry would appreciate it. If you sold your home for $750,000, that would buy you a condo in the area you love. With your $250,000 exclusion, the taxable gain on your home sale would be $100,000 but if you deeded that part to the foundation just before the sale, you will bypass tax on that $100,000 and have a charitable deduction. You’ll end up with no tax on the transfer and about $600,000 cash. After you purchase your new home, you’ll still have $300,000 to invest any way you like.”

Dora: “That sounds like it will work perfectly for me. Let’s give Guy, at the Foundation, and Bob, my attorney, a call and see if we can get the gift set up. Then all that’s left to do is list the home and find a buyer. I’m looking forward to settling into the retirement community so I can be closer to my friends!”